SA gets welcome reprieve from Moody’s

Moody’s Investors Service was expected to deliver an outlook on South Africa at around 10 pm Friday evening but left many sitting staring at their screens instead of beside the braai, waiting for an announcement that only came in the hours that followed.

When the agency eventually delivered an update in the early hours of Saturday morning, it was a non-event. Moody’s updated its website to list South Africa under “ratings that were not updated for issuers on the calendar for March 29” without releasing a supporting outlook.

While market participants were able to breathe a collective sigh of relief, many were left disappointed when the rating agency didn’t list any reasons for not releasing a rating report on the country.

“South Africa has been denied its cathartic moment of actually knowing the opinion of Moody’s and its updated views,” comments Peter Attard Montalto, head of capital markets research at Intellidex. “There was no rating update at all, no opinion, no research report, no comment.”

Outlook still ‘stable’, on paper

Moody’s currently has SA’s debt rated at Baa3, which is one level above junk with a stable outlook. The two other big rating agencies, S&P and Fitch, have already downgraded the sovereign to full junk status. Many expected Moody’s to follow suit on Friday as key risks like the electricity crisis have weighed on SA’s outlook.

The South African Reserve Bank kept the benchmark repo rate unchanged at 6.75% on Thursday, and lowered its growth forecasts for 2019 and 2020, citing weak business confidence and the prospect of further potential load shedding. 

Intellidex’s Montalto says the dagger is still hanging over the economy with no new sense of how close to the edge things are. This is “despite load shedding and the fact Moody’s told investors it was updating its forecasts during the second half of March”.

Economists were divided on the direction Moody’s would take ahead of the decision. Half of the participants in a Bloomberg survey expected the agency to maintain a stable outlook on its local- and foreign-currency debt, with the remainder predicting a cut to negative. Many of those who expected no change said there might be a move after the May 8 general election.

The decision is seen as a welcome reprieve as it allows the country to keep its spot in the World Government Bond Index and remain in the Citigroup World Bond Index. This is, however, not the time to sit back and relax.

Opportunity

“SA Inc ought to take this as an opportunity to get its fiscal house in order and its policies aligned to a pro-growth and confidence-inspiring economic strategy,” says Business Unity SA (Busa). The grouping views five focus areas as critical in efforts to ensure SA retains its investment-grade credit rating: political stability, policy certainty, the reform of state-owned enterprises, structural reform and a credible growth roadmap.

It says land expropriation without compensation and the visa regime are two of the most significant policy issues that need to be comprehensively addressed. “The government needs to work with social partners in determining timelines, modalities and an implementation framework.”

Eskom, however, remains the biggest risk to the economy, Busa says. Since November last year, power cuts have been a regular occurrence across the country as cash-strapped Eskom battles to get to grips with a shortage of electricity capacity due to years of mismanagement at the power utility. 

“A comprehensive and an aligned position is required between the power utility and its stakeholders on how to effect a restructuring within the context of a broader overhaul of the energy sector.”

‘Immediate action’ on reforms

Commenting on the Moody’s decision in his position as leader of the CEO Initiative, Eskom chairman Jabu Mabuza says that ensuring operational and financial sustainability at the power utility is crucial to enabling economic growth. “This underscores the need for immediate action on implementing the reforms necessary – including splitting the organisation into three units – as a step to return the utility to a position of stability.”

The decision has given the country breathing room but there are still hard decisions that need to be taken, says the Banking Association of SA. It refers to fixing the fiscus and tackling structural changes needed to create an environment of economic growth. 

The association says that while the government is doing much to restore leadership and good governance, reforms are moving at a slow pace. The country must urgently speed up the pace of reforms, such as removing “obvious economic stumbling blocks”.

“We can no longer afford to delay implementing reforms necessary for inclusive growth and job creation.”

Continued weak economic growth remains the greatest threat to South Africa’s credit rating. “This can only change if government acts decisively now,” says Busa. “No matter the coming election, if we continue to squander economic opportunities because of narrow political interests, South Africa will not be in any better position when the next credit rating review rolls around, later this year.”

The next rating date in Moody’s calendar date will be on November 1, after the medium-term budget speech.